Commercial Mortgages Direct HUD 223f loan program guidelines are as follows

SECTION 223(f)

FACT SHEET

PURPOSE: The intent behind HUD providing insured financing for existing multifamily properties is to assist in the conservation/preservation of existing housing resources.

DEFINITION: Section 223(f) of the National Housing Act authorizes HUD-FHA to insure first mortgage loans, made only by HUD-approved mortgagees executed in connection with the purchase and/or refinancing of an existing multifamily rental apartment development, nursing home, intermediate care facility (ALF), or board and care home.

ELIGIBLE PROPERTIES:

a) Must consist of five (5) or more living units, each of which must be designed primarily for residential rental use and provide complete living facilities, including provisions for eating, cooking and sanitation.

b) Must be three (3) years old; that is, three years must have elapsed from the later of (i) the date of completion of construction or the last substantial rehabilitation, or (ii) the date of initial occupancy to the date of application for the 223(f) insured mortgage.

c) Must, in their present condition, meet general criteria for livability, without the cost of repairs, replacements and improvements exceeding the greater of:

(i) fifteen percent (15%) of HUD’s final estimate of value of the property after repairs, or

(ii) $6,500 per living unit, which may be increased by HUD’s published high cost factor for the area in which the property is located.

d) Must not require that more than one major building component be replaced. The term “major building component” includes roof structures, ceiling, wall, and floor structures, foundations, elevator(s), plumbing, heating, air conditioning, or electrical systems.

COMMERICAL AREAS:

Properties may include commercial space. However, commercial areas may not exceed twenty percent (20%) of the total net rentable area of the property, and commercial income may not exceed twenty-five percent (25%) of the projected total gross income of the property.

SUBSTANTIAL REHABILITATION:

Substantial rehabilitation of a property is not permitted under Section 223(f). If the cost of repairs and improvements exceeds the guidelines as stated above under “Eligible Properties,” paragraphs c) and d), then the request for mortgage insurance must be processed under another HUD program, i.e. Section 221(d)(4) substantial rehabilitation.

REAL ESTATE REQUIREMENTS:

All properties must be on real estate held, or to be held:

a) in fee simple, or

b) under a renewable lease for a period of not less than 99 years, or

c) under a lease having a period of not less than 10 years to run beyond the maturity date of the HUD-insured mortgage.

TENANT SELECTION:

Occupancy is not restricted on the basis of tenant income. All families and individuals subject to normal tenant selection procedures are eligible for occupancy. There are no income restrictions unless:

a) the project is subsidized by HUD i.e. via Section 8 Rent Subsidies or

b) the mortgage is financed through tax-exempt bonds, or

c) the borrower receives Low Income Housing Tax Credits (LIHTC), Historic Preservation Tax Credits, or HOME funds.

ELIGIBLE BORROWERS:

The following types of borrowers are eligible for participation in the Section 223(f) program:

a) Private or public entities, which may include for-profit entities, or not-for-profit entities, individuals, corporations, general or limited partnerships, and limited liability corporations (LLC’s). NOTE: All entities created to be the borrower under a HUD-insured mortgage transaction must be single asset entities.

For applications involving cooperative housing developments (Co-ops), eligible borrowers must be either a non-profit cooperative ownership housing corporation, or a non-profit cooperative ownership housing trust. Such non-profits must be regulated under Federal or state law, i.e. 501(c)(3).

SPECIAL CONSIDERATIONS:

a) The property must be projected to attain sustaining occupancy (i.e. sufficient income to pay all operating expenses, annual debt service, HUD annual mortgage insurance premiums, and reserve fund for replacements) within twelve (12) months from endorsement of the mortgage note for insurance by HUD.

b) The last three (3) years of actual income and operating expense statements for the property are required.

c) An initial deposit to the reserve for replacement escrow is required at the time of closing, as determined by HUD.

d) The controlling local authority must inspect the property in order to identify any local building code violations.

e) HUD does require reports by competent engineers covering such items as the condition and/or remaining useful life of structural and mechanical elements, and/or environmental reports.

f) Reports will be required concerning lead-based paint and asbestos testing (if property constructed before 1978). In some instances (i.e. state of Florida) a report concerning radon testing may also be required.

g) In areas of high termite and/or other pest infestation, a qualified certification that the property is free of damage and/or infestation will be required.

MORTGAGE LIMITS:

A. Purchase/acquisition transactions:

The insured loan amount will be the lesser of:

a) an amount not to exceed 85% of HUD’s estimated value of the property after repairs (if any), or

b) an amount which entails a debt service not to exceed 85% of the property’s net operating income, or

c) 85% of the amount required to acquire the property. The cost of acquisition is defined as the sum of the acquisition price, plus repair costs (if any), financing and closing costs, the initial deposit to the reserve for replacements escrow, and any eligible architects fees, engineering fees, and/or municipal inspection fees.

B. Refinance transaction:

The insured loan amount will be the lesser of:

a) Same as A. a) and A. b) above, or

b) An amount which equals the greater of:

(i) 80% of HUD’s estimate of the value of the property, or

(ii) The cost to refinance the property, which may include: the amount(s) required to pay off all existing debt against the property, the costs of repairs (if any), the amount required to fund the initial deposit to the reserve for replacements escrow, financing and closing costs, and any eligible architects fees, engineering fees, and/or municipal inspection fees.

UNDERWRITING CONSIDERATIONS/FEATURES:

a) Mortgage term cannot be (i) less than 10 years (ii) more than 35 years, or (iii) in excess of 75% of the estimated remaining economic life of the physical improvements.

b) All mortgages must be fixed interest rate, level annuity payment, fully amortized loans.

c) Maximum loan amount equal to 85% loan-to-value, as determined by HUD.

d) 1.17 to 1 minimum debt service coverage.

e) Minimum of five percent (5%) vacancy factor.

f) Property must remain rental housing for five (5) years form the date of endorsement of the mortgage for insurance by HUD.

g) No personal liability.

h) Permanent loan is assumable.

i) No limit on number of loans to one borrower.